Enrichment ‘at the expense of’: A critical analysis of the test of unjust enrichment

Abstract

The law of unjust enrichment, despite being a foundation of private law, has been subject to much debate regarding its exact scope. A product of this discourse has been the emergence of new approaches to deal with the concept of enrichment ‘at the expense of’ the claimant, the second in a four-part test proposed by Birks in his leading text on unjust enrichment. This article aims to evaluate these approaches to the law in light of recent case law including Investment Trust Companies v Her Majesty’s Revenue and Customs and Prudential Assurance v Her Majesty’s Revenue and Customs. It then discusses the way forward in developing this area of law.

Introduction

The law of unjust enrichment, despite being one of the foundational pillars of private law, has been subject to much debate regarding its presence as a unifying law. Much of the critique has been directed towards Birks’ four-stage approach for establishing liability in unjust enrichment, namely ‘enrichment’, ‘at the expense of’, ‘unjust factors’ and ‘defences’.1 Despite affirmation by case law, as in Benedetti v Sawiris2 and Lipkin Gorman v Karpnale Ltd,3 this approach has found disfavour amongst academics on the basis that it encompasses too broad a spectrum of cases.4 It is out of this article’s scope to discuss whether there is a need to move away from a general law of unjust enrichment and the various possible divisions of the cases for restitution that fall within it. This article, however, evaluates the recently proposed alternative approaches to the criterion of enrichment ‘at the expense of’ the claimant, and argues that, with respect, the narrowing of the ‘at the expense of’ criterion in Prudential Assurance Co Ltd v HMRC5 should be rejected in favour of the approach proposed by Burrows.

Part I: Theoretical Understandings

Various academics have proposed different approaches to the concept of enrichment ‘at the expense of’ the claimant, with increasing academic commentary surrounding the topic.6 Specifically, the approaches taken by the leading texts of Birks7 and Goff & Jones8 are all directed towards the idea of creating an overarching law of unjust enrichment. Accordingly, the criterion of enrichment ‘at the expense of’ the claimant proposed by them has a broad starting point, with a transfer of value that fulfils the ‘but for’ causation test.9

I. Direct conferral of benefit

Burrows, a strong advocate for the law of unjust enrichment, has suggested an alternative approach that aims to narrow the scope of the ‘at the expense of’ criterion.10 He proposes that ‘at the expense of’ should refer to a direct conferral of benefit by the claimant on the defendant.11 In other words, there needs to be a transfer of value from the claimant that is distinguished from a mere consequential gain resulting from the transfer.12 With this approach, Burrows opted for a narrower viewpoint with the potential of incremental expansion,13 as opposed to starting from a wider viewpoint and seeking to negative particular claims to reach acceptable results. By doing so, he addresses the concern that a mere causal connection test would unnecessarily extend the ambit of unjust enrichment too far – an issue commonly raised in the broader critiques against the law of unjust enrichment.14

Burrows’ justification finds support in the writings of Wilmot-Smith, who argues that since the law of restitution is primarily concerned with defective transfers, there should be no liability from mere causation.15 For example, in the hypothetical scenario where the defendant has burnt an extremely rare stamp, making the stamp owned by the claimant even more valuable, no transfer of value has occurred.16 Wilmot-Smith argues that this is because a transfer of value requires the operation of a pecuniary externality. This appears to be a valid justification as it is compatible with previous case law, such as in Sempra Metals Ltd v Inland Revenue Commissioners (“Sempra Metals”).17 In this case, the claimant could not recover the mistaken payment of tax made from the claimant to the defendant because this profit would not have been gained ‘at the expense of’ the claimant, albeit being causally linked.

More compelling support lies in the authoritative case of Investment Trust Companies v Her Majesty’s Revenue and Customs (“ITC”).18 Prior to this case, there had been a certain degree of ambiguity as to whether a claimant may leapfrog a third party to recover restitution from a defendant. In other words, the question was whether only the direct provider of a benefit is entitled to restitution.19 There appear to be three main views on the issue. First, according to Virgo, such claims by indirect providers of the benefit can never succeed.20 Second, according to Burrows, indirect providers cannot generally succeed, subject to limited exceptions.21 Third, according to Goff & Jones, indirect providers can always succeed.22 These reflect the spectrum of approaches taken to the ‘at the expense of’ criterion as discussed above. Following ITC, it was established that, as a general rule, a direct transfer of value is required before a claim in restitution can be made,23 in line with Burrows’ thesis. Indirect providers therefore can only be entitled to the restitution of benefits under certain exceptions,24 including situations where there is a legal ‘equivalent to a direct transfer’.25 For example, in the case of Menelaou v Bank of Cyprus UK Ltd (“Menelaou”)26, two co-ordinated transactions were held to be one single scheme or transaction.27 In this case, the bank was able to make a claim in restitution against the appellant as it was found that the appellant was enriched ‘at the expense of’ the bank, despite two transactions occurring (between the bank and the appellant’s parents, and the appellant’s parents and the appellant). By applying the judgment in ITC, this would constitute one single scheme and hence a direct conferral of benefit. This lends further justification to the general rule established above, as it indicates how the leading view should be the one posited by Burrows.

Furthermore, the issue of causation was also addressed by ITC, resulting in the narrowing of the ‘at the expense of’ criterion in line with Burrows’ approach. In the leading judgment, Lord Reed criticised previous cases such as Menelaou and Relfo Ltd v Varsani (“Relfo”)28. The use of a ‘sufficiently close causal connection’29 and ‘sufficient link’30 respectively as the requirements for ‘at the expense of’ were criticised for their vague and generalised language,31 given the tautology in the expression that a link is a sufficient connection. It is worth specifically noting that the court in Menelaou had explicitly adopted the use of ‘sufficiently close causal connection’ in place of the criterion of a direct transfer of value being present due to the latter being ‘pure formalism’,32 leading to a judgment based more on substance than form, where the court chose to dismiss without argument formalistic views in favour of the reality of the situation. As argued by Swadling, such deviation from established law should be accompanied by greater substantiation.33 ITC therefore sought to correct the state of law by providing a more precise definition for the concept, stipulating that the starting point in determining whether an enrichment was ‘at the expense of’ the claimant is the claimant incurring a loss to the defendant through the direct provision of the benefit. In other words, a ‘but for’ causation alone would be insufficient to constitute a transfer of value,34 reducing occasions on which cases like Menelaou would arise by requiring a much stricter causal link in the form of direct benefit. It is therefore apparent that the language adopted in Burrows’ approach is more in line with the current state of the law as opposed to the traditional approach offered by Birks and in Goff & Jones. This lends credence to Burrows’ argument that the ‘at the expense of’ requirement should be narrowed.

II. Performance approach

A contrasting approach has been taken by Stevens, who suggested that the focus should lie not on the benefit itself, but rather on the defendant’s acceptance of the benefit.35 Stevens therefore formulates unjust enrichment as a performance by the claimant and subsequent acceptance by the defendant, without the requisite payment by the defendant. By doing so, he rejects Birk’s four-stage approach, arguing that ‘enrichment’ cannot be distinguished as a criterion from ‘at the expense of’ as they reference the same idea (performance and acceptance) from differing perspectives.36

Stevens’ approach to unjust enrichment is rooted in a broader criticism of a unifying law of unjust enrichment, on the basis that the four-stage approach has unnecessarily created an expansive scope to the law of unjust enrichment.37 Similar to Smith, he argues that for unjust enrichment to be a valid subset of private law (similar to contract and tort law), there needs to be a normative justification as to why the four-stage test is treated as a cause of action that determines if restitution is to be given.38 However, this article seeks to counter this argument on two points.

First, while courts do regard the four-stage test as a mechanism to structure the inquiry, the fundamental approach to a case is still very much rooted in the common law methodology, where judgments are made on an incremental basis based on precedent.39 This approach has been further reinforced by Lord Reed in ITC.40 As a result, this minimises incidences where judges are determined to push the ambit of law too far on their own in the absence of a well-defined structure, as can be seen in the tort law case of Anns v Merton London Borough Council41 and the overruled judgment of TFL Management Services Ltd v Lloyds TSB Bank42 (“TFL”) in ITC.43 Hence, instead of creating an overgeneralised scope to the law of unjust enrichment, the four-stage test including ‘at the expense of’ allows courts to provide a structured reasoning in their judgments that shall be beneficial for the continued development of the law.

Second, it can be argued that there is a broad normative reason for the law of unjust enrichment taken from Roman law, where ‘[a]ccording to the law of nature, it is equitable that no person be enriched to the detriment of another’.44  Lord Clyde in Banque Financière de la Cité v Parc (Battersea) Ltd45 furthered this principle’s application to unjust enrichment by explaining why the law requires that enrichment of the defendant must come about from the loss of the claimant.46 While referring to the overarching law of unjust enrichment as seeking to rectify defective transfers of value in ITC, Lord Reed also alluded to the Aristotelian concept of corrective justice as the restoration following the disruption of equilibrium.47 This shows the presence of normative justifications underpinning the law of unjust enrichment. Additionally, caution should be employed in seeking a normative reason for more specific areas of unjust enrichment, such as the specific criteria of the four-stage test. Apart from the fact that the test is merely to provide structure to judgments, substance-over-form arguments, where legal rules are dismissed by judges without argument should they disprove of them, may lead to erroneous judgments.48 For example, in Menelaou,49 the bank’s counterclaim for subrogation was accepted in the Court of Appeal and Supreme Court on the basis of reflecting the ‘economic reality’ of the situation, reversing the previous High Court judgment. As explained above, this had the unfortunate effect of creating too broad a scope of the causal element of the ‘at the expense of’ test that was ultimately rejected in ITC.50 The presence of a normative reason should therefore not be a determining factor when deciding the criterion of whether enrichment has come ‘at the expense of’ the claimant.  

Still, Stevens’ approach may be appealing at the outset due to its ability to explain the law around incidental benefits. This refers to situations where, for example, the claimant mistakenly destroys a rare collectable, causing the defendant’s collectable to increase in value since its rarity has increased. It was held in ITC that no claim in restitution can be made for incidental benefits,51 a clear overruling of TFL. Based on the performance approach, in the case of incidental benefits, there has been no acceptance of the claimant’s performance by the defendant, and hence no valid claim by the claimant for the relevant performance in restitution can be made.52 However, I argue that ITC aligns more closely with Burrows’ understanding of enrichment ‘at the expense of’, given that the focus is placed on whether a benefit has been conferred by the claimant, as opposed to whether the defendant has chosen to actively accept it. Burrows’ approach is also more helpful in expressing the underlying justification behind the rule regarding incidental benefits by focusing on the claimant, given that a claimant’s original act that resulted in an incidental benefit to the defendant would be for the primary purpose of benefitting oneself. There would therefore be no direct conferral of a benefit from the claimant to the defendant since the benefit was only incidental in nature, and hence no corrective measure would be required to rectify a disruption in both parties’ positions. In this regard, there is no need to consider whether an acceptance by the defendant has occurred since there has been no benefit directed towards the defendant in the first place. This illustrates how Burrows’ approach better justifies the ‘at the expense of’ requirements in the law. 

A more striking contrast between the two approaches lies in the issue of correlation. As outlined above, Stevens’ approach is built upon the concern that ‘at the expense of’ refers to the claimant alone.53 As such, due to the purported lack of correlation between the claimant and the defendant, Stevens’ approach requires both a performance by the claimant and the defendant’s subsequent acceptance. However, it follows from Burrows’ approach that the ‘at the expense of’ criterion is necessarily correlative between the claimant and the defendant, since a claimant’s ability to claim for restitution is dependent upon a right over a particular individual (in this case, the defendant). Furthermore, the defendant’s acceptance is not relevant to whether or not a claimant has been enriched. This can be seen through the issue of correspondence, where a ‘but for’ causal link in the transfer of value from a claimant to the defendant is insufficient although an equivalence of the claimant’s loss and defendant’s gain is not necessary. This was particularly highlighted in ITC, where it was established that the loss need not be in the same sense as a loss relating to damages, as “restitution is not a compensatory remedy”.54

The biggest drawback of Stevens’ approach, acknowledged by Stevens himself, would be that it does not fully represent the current state of the law.55 While this lends support to his argument that English law has taken a wrong approach with regards to cases of unjust enrichment, it is worth noting that the current state of the law has been built upon a significant number of cases that would have to be overturned if Stevens’ approach were to be followed, including authoritative judgments such as Lipkin Gorman v Karpnale Ltd,56 Deutsche Morgan Grenfell v Inland Revenue Commissioners,57 and Banque Financière de la Cité v Parc (Battersea) Ltd.58 In addition, Stevens’ analysis – as applied to cases such as Greenwood v Bennett59 – would unsatisfactorily differ from the established law. In the case, the claimant mistakenly repaired a car belonging to the defendant assuming he had valid title to it. It was held that the claimant was entitled to restitution for the improvements made to the car, given that it was established that the defendant was enriched as a result.60 However, if the performance approach were to be adopted, no claim would have been available as there was no acceptance from the defendant.61 Therefore, adopting Stevens’ approach would require a radical shift in the state of the law, the benefits of which may be limited relative to the potential disadvantages as presented in this section.

Part II: Narrowing the definition of ‘at the expense of’

Nevertheless, in the latest Supreme Court judgment pertaining to the concept of enrichment ‘at the expense of’ the claimant, Prudential Assurance v Her Majesty’s Revenue and Customs (“Prudential”),62 it appears that the court had adopted some of the reasoning employed by Stevens. This raises the question of whether the present law should head towards the further narrowing of the criterion of enrichment ‘at the expense of’ in line with the performance approach.

In Prudential, the Supreme Court overruled Sempra Metals regarding the availability of compound interest for restitution of payment made under a mistake of law.63 While offering several reasons for this decision, the judgment centred around the general principle that the defendant was not enriched ‘at the expense of’ the claimant. The law prior to Prudential was such that, in principle, the claimant would be entitled to recover compound interest on the amount by which the defendant had been unjustly enriched.64 However, it was determined in Prudential that the lost opportunity to use the money due to the passage of time would not constitute a benefit ‘at the expense of’ the claimant, and hence compound interest would not be available as restitution.65

The judgment explicitly disagreed with Lord Nicholls’ reasoning in Sempra Metals, which suggested that there were indeed two separate benefits directly provided or transferred, namely the capital sum of interest and the opportunity to use that capital sum,66 and considered the capital sum owed as the only direct benefit. This effectively narrows the definition of what a direct benefit constitutes, since if articulated using Burrows’ approach, there is also a direct conferral of the benefit of an opportunity to use the capital sum prior to restitution from the claimant to the defendant.

Academics such as Mitchell have criticised this judgment since the exclusion of the latter benefit ultimately still leaves the defendant directly and unjustly enriched.67 This is best illustrated if the capital sum in question were to be hypothetically represented as a car, and the claimant had mistakenly given the defendant the opportunity to use the car for a period of time thinking a transfer of title had been made.68 In such a case, rejecting a restitutionary remedy for the use-value of the car of that particular period would be contrary to the law of unjust enrichment, given that the defendant would have had the beneficial use of the car, transferred directly by the claimant, for nothing.69 This is notwithstanding the fact that a claim for liability exists in tort, given that compensatory damages are necessarily correspondent (in other words, what the claimant can recover is directly correspondent to the defendant’s gain), while a claim under unjust enrichment allows for a more accurate reflection of the claimant’s loss. As explained earlier, this article deals with the issue of correlation. Therefore, this article believes that utilising Prudential’s narrow approach of what constitutes a direct transfer could lead to outcomes where the unjust enrichment is not properly rectified.

However, it is submitted that the decision to overrule Sempra Metals was still accurate on the basis of the other reasons in the judgment (in essence, policy reasons)70 rather than as a matter of principle on the law of unjust enrichment.71 The first involves the ‘seriously untoward consequences’72 with regards to the judgment’s effect on public finances, namely the potential £17 billion extra that would have been payable by HMRC purely on the difference between the use of compound as opposed to simple interest in Littlewoods Retail Ltd v Revenue and Customs Comrs.73 The second policy concern is that of statutory construction, with Lord Nicholls recognising the tension the decision in Sempra Metals had with existing statutes.74

A further counter-argument against Prudential is that it wrongly relies on ITC’s reasoning regarding the ‘directness’ requirement.75 ITC was concerned with the issue of indirect providers leapfrogging a third party to claim restitution. In contrast, the directness dealt with in Prudential concerned the benefit itself, as opposed to the relative position of the defendant while making the claim in restitution. It therefore seems out of place to employ the reasoning in ITC to Prudential, given the focus on different areas within the criterion of ‘at the expense of’.

Part III: Conclusion

Following the case of ITC, it is clear that the criterion of enrichment ‘at the expense of’ the claimant has evolved and key aspects have been clarified. It appears that Burrows’ understanding of enrichment ‘at the expense of’ the claimant provides the best justification for the current requirements of the law. While Stevens has attempted to provide an alternative approach to the ‘at the expense of’ criterion, it is limited by its applicability to the reasoned judgments in case law. As such, it is suggested, with respect, that the conclusion in Prudential, while ultimately accurate, was wrongly derived from an overly narrow interpretation of the ‘at the expense of’ criterion. It is worth following the courts’ decisions to see if future cases reverse the current trajectory set in Prudential.

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[1] Peter Birks, Unjust Enrichment (2nd edn, Oxford University Press 2005) 39.

[2] [2013]  UKSC 50, [2014] AC 938.

[3] [1991] 2 AC 548 (HL).

[4] That is the general dissent, although academics within themselves disagree on how the law of unjust enrichment should be divided. See Lionel Smith ‘Restitution: A New Start?’ in Peter Devonshire and Rohan Havelock (eds), The Impact of Equity and Restitution in Commerce (Oxford University Press 2019) 91; Nils Jansen, ‘Farewell to Unjustified Enrichment’ (2016) 20 Edinburgh Law Review 123; Steve Hedley, ‘“Farewell to Unjustified Enrichment?” – A Common Law Response’ (2016) 20 Edinburgh Law Review 326; Peter Watts, ‘“Unjust Enrichment” – the Potion that Induces Well-meaning Sloppiness of Thought’ (2016) 69 Current Legal Problems 289.

[5] [2018] UKSC 39.

[6] Charles Mitchell, Paul Mitchell and Stephen Watterson, Goff & Jones: The Law of Restitution (9th edn, Sweet & Maxwell 2016) paras 6-01-6-63; Birks (n 1) 74-99.

[7] Birks (n 1).

[8] Mitchell, Mitchell and Watterson (n 6) para 6-01.

[9] See also Michael McInnes, “‘At the Plaintiff’s Expense’: Quantifying Restitutionary Relief” [1998] Cambridge Law Journal 477; Charles Mitchell, “Liability Chains”, in Simone Degeling and James Edelman (eds), Unjust Enrichment in Commercial Law (Lawbook Co, Sydney 2008), 131_-_145; Eli Ball, Enrichment at the Claimant’s Expense (Hart Publishing 2016).

[10] Andrew Burrows, ‘In Defence of Unjust Enrichment’ [2019] Cambridge Law Journal 521.

[11] Andrew Burrows, ‘“At the Expense of the Claimant”: A Fresh Look’ [2018] Restitution Law Review 167.

[12] Andrew Burrows, The Law of Restitution (3rd edn, Oxford University Press 2011) 66-69.

[13] Andrew Burrows, ‘Narrowing the scope of unjust enrichment’ (2017) 133 Law Quarterly Review 537.

[14] Smith, Jansen, Hadley, Watts (n 4).

[15] Frederick Wilmot-Smith ‘Taxing Questions’ (2015) 131 Law Quarterly Review 521.

[16] ibid.

[17] [2007] UKHL 34, [2008] 1 AC 561.

[18] [2017] UKSC 29.

[19] ibid [67] – [74].

[20] Graham Virgo, Principles of the Law of Restitution (3rd ed, Oxford University Press 2015) 105–119.

[21] Burrows (n 12) 69-85. These include exceptions with regards to tracing and agency.

[22] Mitchell, Mitchell and Watterson (n 6) paras 6-12-6-62.

[23] ITC (n 18) [50]. The full sentence in the judgment states that “for the purposes of the rule, the law treats as equivalent to a direct transfer, in the sense that there is no substantive or real difference”.

[24] These include exceptions with regards to tracing, agency, and subrogation granted to subsisting and extinguished rights. For discussions pertaining to the exact qualifications in each case, see Burrows (n 12) 75-84.

[25] ITC (n 18) [50].

[26] [2015] UKSC 66.

[27] ibid [63].

[28] [2014] EWCA Civ 360.

[29] Menelaou (n 26) [30] (Floyd LJ).

[30] Relfo (n 28) [95] (Arden LJ).

[31] ITC (n 18) [38] (Lord Reed).

[32] Menelaou (n 26) [24].

[33] William Swadling, ‘In Defence of Formalism’ in Andrew Robertson and James Goudkamp (eds), Form and Substance in the Law of Obligations (2019) 95, 110-117.

[34] ITC (n 18) [52].

[35] Robert Stevens, ‘The Unjust Enrichment Disaster’ (2018) 134 Law Quarterly Review 574.

[36] ibid 582.

[37] ibid 574.

[38] Smith (n 4).

[39] Burrows, The Law of Restitution, (n 12) 86-87.

[40] ITC (n 18) [37]-[42] (Lord Reed).

[41] [1997] UKHL 4, [1978] AC 728. The test developed in the case was later overruled in Murphy v Brentwood [1991] UKHL 2 for the over-characterisation of pure economic loss as a form of physical damage.

[42] [2013] EWCA Civ 1415 (CA).

[43] ITC (n 18) [56]-[57].

[44] Pomponius, Justinian’s Digest 12.6.14. See also 50.17.206 “According to the law of nature, it is equitable that no person shall be wrongly enriched to the detriment of another”.

[45] [1998] UKHL 7, [1999] 1 AC 221 (237) (Lord Clyde).

[46] ibid at 237 (Lord Clyde).

[47] ITC (n 18) [42] (Lord Reed).

[48] Swadling (n 33).

[49] Menelaou (n 26).

[50] It is worth noting that while the judgment was criticised, Menelaou was not overruled, given that counsel did not ask the Court to do so, and ITC referred instead to determining whether a series of co-ordinated transactions was equivalent to a direct transfer.

[51] ITC (n 18) [52].

[52] Stevens (n 35).

[53] ibid.

[54] ITC (n 18) [45].

[55] Stevens (n 35).

[56] Lipkin (n 3).

[57] [2006] UKHL 49.

[58] Banque (n 45).

[59] [1973] QB 195.

[60] ibid at 202 (Lord Denning MR).

[61] See also Burrows, The Law of Restitution (n 12) 237-239 for further discussion.

[62]

[2018] UKSC 39.

[63] ibid [80].

[64] Sempra (n 17).

[65] Prudential (n 62) [68]-[74].

[66] ibid [102].

[67] Charles Mitchell, “End of the Road for the Overpaid Tax Litigation?” (2019) Supreme Court Year Book 1, 16–17.

[68] This hypothetical scenario would be materially similar to the facts in Greenwood v Bennett (n 59).

[69] Burrows, ‘In Defence of Unjust Enrichment’ (n 10).

[70] Prudential (n 62) [55]-[67].

[71] Burrows, ‘In Defence of Unjust Enrichment’ (n 10) 540.

[72] Prudential (n 62) [49] (Lord Nicholls).

[73] Case C-591/10 EU:C:2012:478; [2012] STC 1714.

[74] Fredrick Wilmot-Smith, “A Prudent Decision” (2019) 135 Law Quarterly Review 195.

[75] Mitchell (n 67).

Claire Li

LLB (LSE) ’23 and Private Law Notes Editor of the LSE Law Review Summer Board 2021